For most families, the mortgage payment is the single largest bill each month. It’s always there, looming over us like a money-eating monster. Imagine, though, if you didn’t have a mortgage payment. Can you really pay off a mortgage in record time, and spend that money enjoying life instead?
Yes, you can. And we’re here to show you how.
How to Pay Off a Mortgage
If you’re already dreaming of the beach vacations you’ll take once your mortgage is paid in full, we don’t blame you. Paying off a mortgage is one of the best ways to increase your monthly earnings and ensure stability in your budget.
While it’s not easy to pay off a mortgage, there are some steps you can take to make the process faster. Even tackling a few items on the list below could shave years and tens of thousands of dollars off the total price of your home.
1. Refinance
Refinancing your loan can shorten the term of your mortgage, decrease your payments, or free up capital to complete renovations or repairs. Currently, we’re seeing some of the lowest interest rates we’ve seen in decades, so you’re almost guaranteed to save money by refinancing now.
In case you missed it, we talked all about refinancing in this article.
The bottom line is that interest rates are crazy low right now, and most homeowners will benefit from refinancing.
There are three ways you can pay off a mortgage faster through refinancing:
- Refinance to a shorter-term loan. For instance, consider refinancing to a 15-year mortgage rather than a 30. With a lower interest rate AND a shorter term, you’ll save tens of thousands in interest over the life of your loan.
- Refinance to the same term, but with a lower rate. This option lowers your monthly payment. However, you can continue paying the same amount you do now, effectively paying down your principal every month. This will shorten the number of months it takes to pay off your home completely, saving you money on interest as a result.
- Refinance to a lower rate, and borrow against your home’s equity. If you live in an older home, refinancing could give you the capital you need to make costly improvements. These improvements could increase the value of your home, essentially evening out the overall cost.
However, refinancing comes at a cost. You’ll have to pay closing costs, just like you did the first time you took out a home mortgage. Expect these costs to be about 3-5% of the total value of your mortgage. However, a considerable enough reduction in the interest rate will usually pay for these closing costs within 2-3 years (or sooner!)
As a general rule, if the current interest rate is at least 2% less than your current mortgage, it’s worth refinancing. However, some lenders will tell you that even a 1% reduction is enough to refinance, depending on how long you intend to stay in your current home.
Learn more about refinancing and calculate your closing costs here.
2. Pay on the Principal
Remember that stack of papers you signed at the closing table? One of the documents you received was an amortization schedule or a timetable of your mortgage loan payoff. If you look at that document, you’ll notice that your payment never changes over time. However, the amount that goes towards your principal does.
Here’s how it works: early on in your mortgage, most of your monthly payment goes toward interest. That’s because your loan balance is still high. Only a small amount goes towards the principal, or the actual balance you owe on the home.
However, you can typically pay extra on your mortgage every month (check with your lender for details). The amount over your monthly payment is applied directly to the principal. Therefore, you lower the amount you owe on your loan and the amount you’ll pay in interest. This is a great way to pay off a mortgage quickly. You could be debt-free months or even years ahead of schedule.
Even adding an extra $20 a month to your mortgage payment could save you thousands in interest. Want to know just how much you can save? Check out this mortgage payoff calculator!
3. Round Up Your Payments
As we mentioned above, paying a little extra each month can reduce your principal even faster. Chip away at that mortgage by rounding up your mortgage payment.
For instance, if your required monthly payment is $1756, round it up to $1800. You probably won’t notice the difference in your monthly spending, but that extra $44 per month could save you thousands of dollars in interest over the life of your loan. Plus, you’ll be mortgage-free months or even years ahead of schedule.
If you have even more room in your budget, consider rounding up to the next thousand to pay off a mortgage even faster.
4. Switch to Bi-Weekly Payments
The idea here is simple: by paying your mortgage every two weeks rather than just once a month, you’ll end up making one extra monthly payment every year. As we explained above, that extra payment goes directly to the principal, allowing you to pay off your home faster.
To determine your bi-weekly payment, simply take your monthly payment and divide it by two. Some mortgage lenders will accept bi-weekly payments or even work with you to set up automatic payments every two weeks.
Just one extra house payment each year could reduce the overall term of your mortgage by several years.
5. Skip the Coffee
Before you bring out the torch and pitchforks, hear me out on this one. That fancy coffeehouse coffee is at least $5 per drink. Eating lunch out with your colleagues is an easy $15 per meal. Before you know it, you’ve spent $100 or more a month on dining out.
Imagine if you cut your gourmet coffee habit down by half. Or if you packed a lunch twice a week instead of eating out. If you took the money you saved and applied it to your mortgage payment instead, your home would be paid off – free and clear – years earlier than scheduled. (And you waistline you thank you, too)! Imagine how many lunches you could buy when you no longer have a mortgage payment!
Making small changes in your budget and then applying those savings directly to your mortgage could add up to significant savings in the long run.
6. Get Debt Free, Except for Your Mortgage
If you’re paying interest on credit cards, car payments, or other expenses, you have less money to put towards your capital every month. If you can work to pay off your debt or otherwise consolidate debt into a lower monthly payment, you’ll be able to make a larger mortgage payment each month.
You might see a theme emerging here: spend less money on other things. Pay more on your mortgage. Be free of a house payment faster.
7. Work to Clear Private Mortgage Insurance
If you didn’t put at least 20% of the home’s value down on your mortgage, you might still be paying private mortgage insurance (PMI). After the housing crash of 2008-2009, lenders instituted insurance on loans that do not meet this minimum down payment. This payment does not cover your interest or principal and is therefore “wasted” if you want to pay off a mortgage early.
If you want to free up capital to pay more on your loan, focus on decreasing your loan’s principal until it reaches at least 20% of the home’s value. Once you reach this threshold, you no longer need to pay PMI. Then, of course, you can take those savings and apply it directly to your principal and – you guessed it – pay off your mortgage faster.
8. Don’t Waste Refunds and Stimulus Checks
Have a tax refund, stimulus check, or other unexpected income? Before you rush off to buy that 65” 4K TV, consider applying some or all of it towards your mortgage instead. While it’s tempting to buy “stuff” when we get a financial windfall, the best financial decision you can make is to pay off a mortgage early.
Once you don’t have a house payment, you can get the biggest TV money can buy – and still have money left over for popcorn.
Paying off a mortgage isn’t easy. But with some planning and dedication, you could be mortgage-free in less time than you imagined possible.
Leave a Reply